The Coming Global Debt Default Binge: Moody’s Downgrades Japan

The global debt default binge is in process with credit rating downgrades signifying as the initial symptoms.

US credit rating agency Moody’s today downgraded Japan.

From Bloomberg, (bold emphasis mine)

Japan’s debt rating was lowered by Moody’s Investors Service, which cited “weak” prospects for economic growth that will make it difficult for the government to rein in the world’s largest public debt burden.

Moody’s cut the grade one step to Aa3, with a stable outlook, it said in a statement today. Rebuilding costs from the March 11 earthquake and tsunami, along with continuing efforts to contain the Fukushima nuclear crisis, may make it hard for officials to meet their borrowing target this year, it said.

The first Japan downgrade by Moody’s since 2002 reflects deteriorating credit quality across developed nations from Italy to the U.S., which lost its AAA status at Standard & Poor’s this month. While the move adds to the challenges of the next Japanese prime minister, scheduled to be picked next week, the impact on bond yields may be limited by what Moody’s described as domestic investors’ preference for government debt.

The rerating has also been felt in the CDS markets…

The cost of insuring corporate and sovereign bonds in Japan against default increased, according to traders of credit- default swaps. The Markit iTraxx Japan index rose 7 basis points to 153 basis points as of 12:09 p.m. in Tokyo, on course for its highest level since June 10, 2010, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market…

Today’s rating move brings Japan to the same level as China, showing the diverging paths of Asia’s two biggest economies. China replaced Japan as the world’s No. 2 last year and Moody’s has a positive outlook on its ranking

But debt acquisition won’t be curtailed despite the downgrade…

Moody’s said today’s decision was “prompted by large budget deficits and the build-up in Japanese government debt since the 2009 global recession.”

Japan’s public debt is projected to reach 219 percent of gross domestic product next year even before accounting for borrowing to fund reconstruction after the March 11 earthquake, according to the Organization for Economic Cooperation and Development.

The government has amassed a debt of 943.8 trillion yen, according to the Finance Ministry, after two decades of fiscal spending to energize an economy hobbled by the collapse of an asset bubble in 1990 and lingering deflation that’s sapped private demand. The yen’s advance to a post World War II high this year also threatens exports, a main driver of the nation’s economic growth…

The government has pledged to raise the sales tax to 10 percent by the middle of the decade, a rate that would still be below the IMF’s recommendations. The additional revenue is intended to pay for social welfare for the aging population.

Japan’s government plans total spending of 19 trillion yen over five years to rebuild after the magnitude-9 temblor and tsunami that devastated the northeast coast of Japan and triggered the worst nuclear crisis since Chernobyl.

Politicians won’t learn until forced upon by economic realities.

So the initial preemptive response to the anticipated downgrade has been to inflate the system using the recent triple whammy calamity as pretext.

Finally, it certainly is not true that current developments recognized as “fiscal austerity” have been about getting off the welfare state-big government-deficit spending path.

What has been happening instead is the political process where massive amount of resources are being transferred from the welfare state to the banking sector.

Global political leaders are hopeful that by rescuing the politically privileged interconnected banks, they can bring 'normalcy' back to the 20th century designed politically entwined institutions of the welfare state-banking system-central banking system.

Proof?

Just look how the Japanese government (and other developed governments) addresses their dilemma—mostly by raising taxes!

As the illustrious Milton Friedman once said,

In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with. That’s what history tells us. So my view has always been: cut taxes on any occasion, for any reason, in any way, that’s politically feasible. That’s the only way to keep down the size of government.

So tax increases equates to the preservation of the welfare state or big government.

Unfortunately, the system has already been foundering from under its own weight. And importantly, politicians apparently blase to these risks, continue to impose measures that would only increase the system's fragility. What is unsustainable won't last.

Did the Joint Currency Intervention for a Weaker Yen Succeed?

Japan’s triple whammy calamity, last March, pushed the yen to the stratosphere. This prompted global finance ministers to jointly intervene in the currency markets to stem its rise.

This from UK’s Guardian.co.uk last March, (highlights mine)

Finance ministers and central bankers from the world's developed nations decided late on Thursday night to send a firm message to financial markets that they would not stand by and watch the yen continue to strengthen

The Bank of Japan began selling yen overnight to depress its value. Other central banks are expected to follow suit as their markets open through today, in a rare concerted move.

The intervention signified as war against speculators: central banks versus speculators.

Over a month since the intervention, the New York Federal disclosed yesterday its participation in the joint action:

The U.S. monetary authorities intervened in the foreign exchange markets on one occasion during the first quarter, on March 18, buying $1 billion against Japanese yen, the Federal Reserve Bank of New York said today in its quarterly report to the U.S. Congress.

During the three months that ended March 31, the dollar depreciated 5.5 percent against the euro but appreciated 2.5 percent against the Japanese yen. In this period, the dollar’s trade-weighted exchange value depreciated 3.7 percent as measured by the Federal Reserve Board’s major currencies index.

The coordinated G-7 intervention was carried out by the foreign exchange trading desk at the New York Fed, operating in conjunction with Japanese monetary authorities, the European Central Bank (ECB) and the monetary authorities of, Canada and the United Kingdom. The intervention amount was split evenly between the Federal Reserve System Open Market Account and the U.S. Treasury’s Exchange Stabilization Fund (ESF).

The blue arrow marks the date when the US government (US Federal Reserve and the Treasury) intervened along with central banks of other nations in a grand scale of collaboration against speculators.

Over the short term, the intervention proved to be a success; the yen weakened.

Today, the yen is seen back at the level where the global governments intervened. In short, billions of dollars of taxpayers money went down the drain.

Bottom line:

Interventions did have immediate effects (which resonates with today’s war against commodities). However, eventually the effects wear out.

Yet who bears the losses from such interventions? Obviously taxpayers!

The battle was won by the central banks in March, but they appear to be losing the war.

Japan’s Calamity: Costliest Disaster Ever

Japan’s recent 1-2-3 calamity has been reported to be the costliest disaster ever.

The Economist writes,

JAPAN is still reeling from the earthquake and tsunami that struck its north-east coast on March 11th, with the government struggling to contain a nuclear disaster and around 10,000 people still unaccounted for. Provisional estimates released today by the World Bank put the economic damage resulting from the disaster at as much as $235 billion, around 4% of GDP. That figure would make this disaster the costliest since comparable records began in 1965. The Indian Ocean tsunami in 2004, which caused some 250,000 deaths, does not feature on this chart. Economic losses there amounted to only $14 billion in today’s prices, partly because of low property and land values in the affected areas.

This is an example where the losses from natural disasters are narrowly viewed in monetary terms. I am not sure if the estimates have quantified casualties in money terms (any estimates will likely be inaccurate and underestimate the value of human lives)

While the $ based losses may be huge, Japan’s disaster seems only a fraction of the 2004 Indian Ocean tsunami in terms of deaths.

For me, lives lost, injuries, displacement and trauma from the disasters are more important (or cost more) than $ based property damages.